The Supreme People’s Court of China: Important Judicial Opinions on Priority Payment Rights in Construction Projects

According to the provisions of the Civil Code of mainland China (see Article 807), the priority right of payment for construction project price (PRPCPP) refers to the right of the contractor of a construction project to receive priority payment from the price obtained through discounting or auctioning the project when the employer is overdue in paying the contract price. For the protection of the rights and interests of construction workers, the PRPCPP legally holds a higher priority order compared to mortgage rights and other priority rights. The legal risk assessment of this priority right is an unavoidable important issue in practice during real estate transactions, investments and execution of auctions, among other aspects.

However, in judicial practice, the actual exercise of the PRPCPP also faces restrictions and challenges. On 27 February 2024, the Supreme People’s Court of China (SPC) officially launched a new case database (all cases reviewed by the SPC, serving as crucial guidance to judicial practice), including many guiding and reference cases involving this important right and imposing necessary restrictions on it. The following judicial opinions of the SPC are worth noting.

This opinion stems from a ruling made by the SPC in March 2021, with the case number 2023-07-2-470-003. In this case, a bank, claiming its mortgage rights over the land, requested the annulment of a court decision that confirmed the priority payment right of the contractor for the construction project on that land. The court ultimately dismissed the bank’s lawsuit.

The SPC holds that the object of the PRPCPP is the construction project minus the value of the land, and does not extend to the land use right occupied by the construction project. Although, according to the principle of unity of building and land, the project and the land it occupies should be auctioned together, this does not affect the validity and scope of the mortgage rights enjoyed by the mortgagee.

This viewpoint stems from a ruling made by the SPC in September 2021, with the case number 2023-17-5-202-020. In this case, a dispute regarding priority payment rights arose between the contractor of a construction project and the mortgagee of the property built by the project. The court finally balanced the rights of priority payment for construction project price and mortgage rights, delineating separate scopes of priority payment.

The SPC holds that if there are two or more holders of PRPCPP on a single construction project, each holder can only claim priority payment for the auction proceeds from the part of the project they constructed, and they have no right to claim priority payment for parts of the project constructed by other contractors.

This view stems from a ruling made by the Higher People’s Court of Shandong Province in March 2023, with the case number 2024-17-5-202-022. In this case, the contractor of a construction project filed an execution objection to the court regarding the auction of the construction project, and the court ultimately dismissed this objection request.

The SPC states that the priority right of payment is a right for the creditor to be preferentially satisfied, which is merely a ranking right and cannot produce the effect of preventing enforcement. Holders of the PRPCPP are not allowed to request a halt to execution on the grounds of their priority right. However, they can, during the execution procedure, propose that the court preferentially allocate the auction proceeds.

This view is based on a judgment issued by the SPC in October 2022, with the case number 2023-16-2-115-012. In this case, the employer of a construction project entered bankruptcy proceedings, and the contractor believed that the project had not yet been settled, resulting in a failure to timely exercise the priority right of payment, which was then deemed extinguished by the court.

The SPC holds that, in the context of the employer’s bankruptcy, the contractor’s claim for project payment accelerates to maturity. The period for exercising the priority right of payment starts when the contractor declares the credit, rather than being contingent on the settlement of project payments. Once this period elapses, the substantive right is extinguished.

To sum up, within China’s judicial practice, the priority right of payment construction project price, due to its special status, often becomes a key factor affecting real estate transactions, investments, enforcement and auctions. The determination of its rights and scope of exercise typically impacts various stakeholders, including project owners, contractors, mortgagees, and property buyers. Based on guidance from the SPC, although the law grants a higher priority status to the property right of payment for construction project price, judicial decisions often balance the interests of other stakeholders, imposing restrictions on the exercise of the PRPCPP.